“From shirt sleeve to shirt sleeve in three generations.”
This saying troubles wealthy patriarchs and patriarchs around the world. This represents the risk that an entrepreneur’s hard-earned wealth will be squandered after passing on to his or her grandchildren. And research shows there is some truth to this. A 20-year research project by a US-based consulting firm found that 70 percent of families who built wealth lost their wealth by the second generation, and 90 percent by the third generation. williams group.
Patriarchs and patriarchs often fail to think beyond tax planning and end up without the infrastructure to successfully transfer wealth. As a result, during a sibling quarrel, his nest egg is eaten by a lawyer, and he ends up back in his shirtsleeves.
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However, that inheritance infrastructure, which can be established through family governance similar to corporate governance, is less well understood due to less disclosure. While corporate governance is reported and covered by government regulations, family governance, by contrast, is opaque, with the exception of occasional court challenges. Best practices tend to be passed down by word of mouth.
However, there are similarities between these two types of governance. For example, a family constitution is very similar to a company charter. Also, adding independent board members to family-owned businesses can help break down some of the groupthink, just as it does on boards of large companies. Additionally, family councils made up of part of the family can represent a broader range of stakeholders and support everyone in decision-making, as advisory boards do within some companies. Masu.
For some families, as much as their corporate transactions may be at stake. In July, UBS said in its annual wealth report that a staggering $83 trillion is expected to be transferred to the next generation over the next 20 years, with much of it occurring over the next 10 years.
That’s why starting family governance can be daunting, says Babetta von Albertini, director of the Institute for Family Governance. The institute provides case studies on how family issues can be resolved without filing a lawsuit. “The hardest part is getting the head of the family or matriarch to do something,” she explains.
83 trillion dollarsUBS estimates the value of assets transferred to the next generation over the next 20 years
Von Albertini cites the case of a family head worth about $3 billion who did no estate planning at all and simply expected his eldest son to succeed him. Naturally, it wasn’t so good for his other children.
One of the first steps for wealthy families is to create a family agreement, advises Thomas Tiegs, managing director of Ascent, a division of U.S. Bank. He said this will lead to questions like, “What roles will family members play? What is the composition of the board? How many seats does it have?”
“We are giving (families) a roadmap to move from little structure and centralized decision-making to this group decision-making and governance process,” Tiegs said. However, he added, “it will take years to implement it.”
A further step could be to establish a family council. This is essentially a group of families selected to represent a larger cohort. This may also include family members and other members who serve on the board of the family company.
“This is a structure that we like because it not only allows us to hear people’s opinions and voices, but also allows us to make more formal decisions to manage the business,” Tiegs says. “(Family) owners still have a way to provide that feedback to the business.”
A wider range of family members may form an assembly, where opinions may be aired. This group may include cousins and people who have intermarried into the family over several decades. These individuals still need a say in their families and their businesses, but may not have decision-making authority.
Mr. von Albertini believes that such family governance structures can act as checks and balances to protect wealth. For example, you could establish a financial advisor or a protection committee to oversee younger and less financially savvy family members. These protection committees, which usually include outside counsel, give families the freedom to make “acceptable mistakes” with their finances.
In one example von Albertini cited, a father gave control of some of the family’s finances to his daughter, who lacked financial experience, but this allowed her to make impactful investments with passion.
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“The idea is to train the family and empower her,” Von Albertini suggests. “The bankers have to go through her family’s office. The conservation committee is a way to develop the next generation.”
Family governance can also deal with discord between siblings. In business relationships, people can walk away when disagreements get nasty. However, wealthy families cannot be cut off so easily.
In situations like this, family business consultant Doug Baumoel believes the solution is to become closer. “If there is one cure for family business conflict, it is for family members to get to know each other better,” he says. “This makes the system more predictable.”
Some believe that the reason why conflicts occur so often in wealthy families is that children do not spend enough time together while growing up. As a result, they are not able to form the same connections with their siblings as they do in middle-class families. For example, in a wealthy family, a child may go to a horse riding camp while a sibling attends sailing school.
“When family members don’t know each other well, mistrust develops,” Baumoer warns. “They didn’t have the opportunity to fight, heal, or compromise because they didn’t have to.”
But Baumoer points out that there may be a simple solution. “I know one family. They live in a very large house, but their two young children insist on sharing a bedroom. It is for this very purpose.”
